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ETF Tracking Question

We know that ETFs (like QQQ) track indexes (like $NDX). We know that on any given day, the ETF won't be exactly the price of the index. We know that over time, however, the ETF price will fluctuate around the index.

What I don't understand is why this ratio ($NDX:QQQ in this case) doesn't vary around some constant ratio. Instead, it shows an obvious negative slope over time. Other ratios ($SPX:SPY, $INDU:DIA) exhibit the same non-horizontal shape. One example is shown below.

I just want to know why the chart doesn't show a horizontal shape. (Is it related to the cumulative tracking error, and if so, how?)

Best Answer

  • gordgord admin
    edited March 2016 Answer ✓
    Yes this is a common mistake, the problem is with the ratio you are using. $SPX is an index, were as SPY is an ETF which pays a dividend quarterly along with an expense ratio charge, (currently 0.09%).

    Now the expense charge is very small and hard to really pick out on the chart, but the dividend adjustments make quite a difference and this is what you are seeing. To avoid this, ratio the $SPX (unadjusted index) with the unadjusted SPY (just put an underscore in front of the symbol _SPY).

    Now to see this a little more closely I've changed to a line chart which only shows the "close" instead of the OHLC which is very noisy chart. I've also zoomed in to just 2 years to get a little more detail and added "Events" to show when the dividends happened.

    Hope this clears things up.


  • That was a great explanation. Thanks very much. (I had never heard of the unadjusted ETF trick.)
  • Note you can use the underscore in front of any symbol that pays dividends or has adjustments (not just ETF's), to chart the unadjusted (raw) data.
  • can u give me symbols for etf ie airlines, biotech etc so that i can find their SCTR
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